Ukraine's embattled government has announced that it is bringing back military conscription to help counter a growing pro-Russia insurgency in the east of the country.

The announcement came after pro-Russia separatists stormed another key public building in Donetsk on Thursday, forcing the surrender of riot police trapped inside, in the latest humiliation for the Kiev government.

A decree issued by Ukraine's interim president, Oleksandr Turchynov, said that compulsory military service – which was scrapped earlier this year – was being reinstated "given the deteriorating situation in the east and the south … the rising force of armed pro-Russian units and the taking of public administration buildings … which threaten territorial integrity".

Earlier, about 1,500 protesters gathered in Donetsk's Lenin Square for May Day celebrations, then marched through the city, chanting "Russia" and "referendum". At the registry office, they pulled down its Ukrainian flag and, to loud cheers, ran up the Russian tricolour instead.

The demonstrators – some in military fatigues and balaclavas, and armed with baseball bats – later laid siege to the regional prosecutor's office. Youths smashed windows and clambered inside. A Ukrainian armoured personnel carrier trundled towards the building then, spotting a large hostile group, reversed at high speed.

About 100 riot police who were supposed to defend the building fell back to an internal courtyard. They formed a tortoise with their shields, but were surrounded by the attackers. Soon afterwards the police gave up, handing their helmets, truncheons and shields to the crowd. The young officers were allowed to file out through a gauntlet of protesters; old women slapped them as they exited. Fifteen people were reportedly injured.

Supporters of the self-proclaimed "Donetsk People's Republic" posed for photographs on the steps of the ransacked building, wearing newly acquired riot gear. Soviet songs blared from a communist party Lada parked in the road. The car flew a flag of Stalin holding a Kalashnikov, and the words: "Death to fascism". There was extensive looting. Two militia volunteers broke the windscreen of a nearby Toyota and sped off in it.

The separatists have called for a referendum on autonomy on 11 May. The Kiev-appointed governor, Serhiy Taruta, has dismissed this poll as ridiculous, pointing out that most of the region's 2.4 million voters won't take part. But the seizure of the prosecutor's office on Wednesday, as well as a string of city halls previously, makes it easier for the separatists to argue their ballot has democratic legitimacy.

The numbers who took part in the pro-Russia May Day celebrations were comparatively small, with most of the city's 1 million people staying away. There are supporters of Ukrainian unity too. But most are now too scared to express their opinions after thugs on Sunday attacked a pro-unity rally and bludgeoned participants with iron bars as police looked on. A concert for Ukraine scheduled for Thursday was cancelled on security grounds.

Meanwhile, Russia's president, Vladmir Putin, told the German chancellor, Angela Merkel, that Kiev should withdraw its forces from the country's south-east and begin a "national dialogue". Merkel had called Putin to ask him to help facilitate the release of a team of Organisation for Security and Co-operation in Europe (OSCE) observers held hostage by the rebels.

"Vladimir Putin stressed that the most important thing today is to withdraw military units from the south-eastern regions, stop violence, [and] to immediately launch a wide national dialogue as part of a constitutional reform with the involvement of all regions and political forces," said a Kremlin spokesman.

In Kiev, the foreign ministry expelled a Russian diplomat it accused of spying. It said the diplomat, whom it didn't name, was caught in a counter-intelligence operation by Ukraine's SBU security service. The diplomat was identified by defence analysts as Kirill Koliuchkin, Russia's naval attache to Ukraine, who was working for Russian military intelligence.